Fitch Places Fluor’s Long-Term Ratings on Negative Watch

NEW YORK

Fitch Ratings has placed Fluor Corporation’s (FLR) long-term Issuer Default Rating (IDR) and debt rating of ‘A-‘ on Rating Watch Negative and affirms FLR’s short-term IDR and commercial paper programs at ‘F2’. The action follows FLR’s announcement yesterday of its agreement to purchase Stork Holdings B.V. for $755 million in cash. The transaction will be largely funded with debt and is expected to close in the first half of 2016. FLR’s short-term ratings are not affected by this rating action. Fitch’s ratings for FLR cover approximately $1 billion in existing debt. A full list of ratings follows at the end of this release.

The Negative Watch incorporates Fitch’s expectation that the increase in debt used to fund the Stork acquisition will increase FLR’s leverage above levels that support the company’s current ratings. Fitch estimates adjusted debt/EBITDAR will increase to north of 2.0x at the end of 2015 compared to 1.3x at the end of 2014, and FFO adjusted leverage will increase to above 2.3x. Fitch expects to resolve the Rating Watch closer to completion of the acquisition and following further review by Fitch of the impact of the transaction on Fluor’s operating profile and credit metrics. A downgrade of the ratings would likely be limited to one notch to ‘BBB+’.

KEY RATING DRIVERS

The proposed acquisition is a departure from FLR’s recent history given that the company has completed only $300 million in acquisitions over the last four years. Fitch believes this acquisition and the increased level of share repurchases may weaken the company’s leverage metrics to levels inconsistent with an ‘A-‘rating. Fitch’s assessment of the projected speed of debt paydown will weigh significantly on the ultimate rating action.

Positive credit considerations from the acquisition include a greater level of project life-cycle diversification which is more correlated to the operating budgets of its existing and new potential clients. Stork provides maintenance, modification and asset integrity services associated with existing oil, gas and petrochemical installations. These abilities are well aligned with FLR’s existing Global Services segment, which provides operations, maintenance and facility management services for the energy, chemicals, life sciences, metals, mining, and manufacturing sectors, contributing 3% of FLR’s 2014 revenue. Stork currently has a run-rate revenue of $1.7 billion and EBITDA of approximately $109 million, implying a transaction multiple of just under 7x. Other financial metrics such as margins and liquidity, as well as qualitative factors such as market position and backlog could remain consistent with the current ratings.

Acquisition concerns include higher debt levels, integration risks, and the valuation.

Free cash flow (FCF) levels have improved throughout 2015, and Fitch expects Fluor to generate over $300 million in post-dividend FCF driven by reduced working capital levels and improved margins. Fitch remains concerned, however, with the firm’s discretionary cash deployment, as the company is expected to repurchase $1 billion of shares for full-year 2015.

KEY ASSUMPTIONS

–If completed, the Stork acquisition will be funded mostly with debt;

–No significant outstanding debt is paid down in the intermediate term;

–The completion of the stated 2015 share repurchase program;

–EBITA margins remain in the low 6% range through 2016.

RATING SENSITIVITIES

FLR’s long-term ratings could be downgraded if it issues material debt, as expected by Fitch, to fund the acquisition of Stork:

–Sustained Adjusted Debt/EBITDAR above 1.75x;

–Sustained FFO adjusted leverage above 2.25x;

–FCF margins consistently below 1.5%;

–Additional debt issuance to fund shareholder-friendly activity.

The Negative Watch could be resolved and the ratings affirmed at ‘A-‘ if the acquisition of Stork is not completed or is completed without a meaningful increase in debt.

LIQUIDITY

The company held approximately $2 billion in available cash and marketable short-term securities, which included $652 million consisting of advance billings from customers on contracts, as of Sept. 30, 2015. FLR does not currently consider any cash to be permanently reinvested overseas. The firm’s strong liquidity and financial flexibility is aided by strong annual cash generation and a favorable debt maturity schedule, with its nearest debt maturity coming in 2021. Liquidity includes availability under two revolving credit facilities totalling $1.75 billion, before the impact of letter of credit usage. Both facilities mature in 2019. Fluor has also provided guarantees totalling $20.5 billion for the performance of its joint venture partners as of Sept. 30, 2015. Fitch views these guarantees as normal within the course of business in the industry and as credit neutral.

FULL LIST OF RATING ACTIONS

Fitch has placed the following ratings for FLR on Rating Watch Negative:

–Issuer Default Rating (IDR) at ‘A-‘;

–Senior unsecured debt at ‘A-‘;

–Senior unsecured bank facility at ‘A-‘.

Fitch affirms FLR’s short-term ratings as follows:

–Short-term IDR ‘F2’;

–Commercial paper programs ‘F2’.

Additional information is available at www.fitchratings.com.

Applicable Criteria

Corporate Rating Methodology – Including Short-Term Ratings and Parent and Subsidiary Linkage (pub. 17 Aug 2015)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=869362

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form
https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=996251

Solicitation Status
https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=996251

Endorsement Policy
https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31

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Fitch Ratings
Primary Analyst:
Akin Adekoya, +1-212-908-0312
Director
Fitch Ratings, Inc.
33 Whitehall St
New York, NY 10004
or
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Director
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Senior Director
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